Federal Reserve Board Policy and the 3.8 Percent Unemployment Rate

Last week’s job report, in spite of the slow job growth for February, was actually pretty good news. As many of us pointed out, the most likely reason that the Labor Department reported only 20,000 new jobs in February, is that the economy reportedly added 311,000 jobs in January.

There is always a substantial element of error in these numbers. If we envision that there is some underlying rate of job growth of say, 180,000 a month, if we get a number like January’s strong figure, it is reasonable to expect that job growth in subsequent months will be slower. Either the rapid growth in January was due to error in the survey, or alternatively many businesses may have decided that January was a good time to hire. In both cases, it is reasonable to expect slower growth in future months.

If this just sounds like hand waving to cover up a bad story, consider that the non-seasonally adjusted change in employment in February was a plus 827,000 jobs. In other words, if we just looked at the raw data, the economy actually added a ton of jobs in February. Of course, the economy always adds lots of jobs in February. In 2018 it added 1,236,000 and in 2017 it added 1,030,000. This is why we have seasonal adjustments. But the adjustment is never perfect, and it is one of the factors that leads to error in the headline numbers that get so much attention.

So we should not be too troubled by the weak job growth reported for February. However, as I noted in my jobs report, there was a drop in average weekly hours, which could presage lower hiring in future months. Also, several sectors, notably construction (both residential and non-residential) and manufacturing seem to be weakening, so there are some grounds for concern about slowing growth, apart from the 20,000 jobs reported for February.

But I actually wanted to focus on the good news in the report, specifically the edging down of the unemployment rate to 3.8 percent and the modest acceleration in the rate of growth in the average hourly wage to 3.4 percent over the last year. These items are very good news, especially when we consider that they were the result of policy, specifically the Federal Reserve Board’s decision to allow the unemployment rate to fall below the 5.5 percent unemployment rate that most economists had considered a floor.

The conventional view was that inflation would begin to spiral upward if the unemployment rate fell below 5.5 percent (many economists put the floor at 6.0 percent or even higher), therefore the Fed should begin to raise interest rates to slow the economy and job creation and to keep the unemployment rate from falling below this level. The group of economists arguing this position included some of the Fed’s governors and bank presidents, with at least one of the latter arguing for rate hikes as early as 2011.

Fortunately, the inflation hawks did not carry the day. The Fed, under the leadership of then-chair, Janet Yellen, allowed the unemployment rate to continue to fall. As I have pointed out elsewhere (here, here, and here), lower unemployment not only means that more people have jobs, it disproportionately benefits the most disadvantaged in the labor market. The job gainers are disproportionately black, Hispanic, people with less education, people with disabilities, and people with criminal records.

This fact should make Federal Reserve Board policy a major issue on progressives’ agenda. I am proud to say that CEPR has worked with the grassroots coalition Fed Up to pressure the Fed to comply with the full employment portion of its mandate. Our allies in making the economic argument included the Economic Policy Institute, my friend from EPI days Jared Bernstein who is now at the Center for Budget and Policy Priorities, and Bill Spriggs, another old friend from EPI (see a pattern here?) who, as its chief economist, helped bring along the AFL-CIO. The work of this group helped to counteract pressure from inflation hawks who would have the Fed only worry about inflation and not concern itself with maintaining high levels of employment.

While we can be pleased with our success in pressing the Fed (of course we had some great allies on the inside, including Fed Governor Lael Brainard, Minneapolis Bank President Narayana Kocherlakota, and his successor Neel Kashkari), it is still striking how little attention Fed policy gets from the larger progressive community. Although the Fed Up campaign did have the support of one generous funder, for the most part, our work was spare-time activity.

Imagine that someone came up with a job training program that gave another 3 million people jobs with a disproportionate share of the job gainers being the most disadvantaged people in society. I suspect the major liberal foundations would be falling over themselves to fund this program, anxious to take part of the credit for the success.

Of course, the benefits from low unemployment go beyond just getting more jobs. The tighter labor market gives workers at the middle and bottom of the labor force the bargaining power to get real wage gains. We saw this in the late 1990s boom, when the period from 1996 to 2001 gave us the first period of sustained real wage growth for the middle and bottom of the labor force since the early 1970s. Real wages have been rising since 2014, with low- and middle-wage earners seeing real wage gains of between 4.0 percent and 6.0 percent.

That’s not great, but it is going in the right direction and is hardly trivial. For a full-time worker getting $15 an hour, this implies wage gains of between $1,200 and $1,800 a year. For a worker earning $25 an hour, this implies wage gains of between $2,000 and $3,000 a year. We can be pretty certain that if the inflation hawks had kept unemployment from falling below 5.5 percent the path of wage growth would have looked very different the last four and a half years.

One other source of frustration in this effort is the folks on the left who feel the need to remind us that almost 40 million people are still below the poverty line and that more than 40 percent of black children live in poverty. These statistics are, of course, horrible and unacceptable, but it is a bit bizarre they continually get brought up in the context of efforts to lower the unemployment rate and increase wage growth at the middle and the bottom.

If we had successfully pushed for an increase in the Earned Income Tax Credit or an increase in the availability of high-quality child care, would people feel the need to remind us that there are still plenty of people who are suffering? It’s pretty much of a non sequitur. None of us thought that we could right all the wrongs in the economy and society by getting the Fed to allow the unemployment rate to fall further.

We did feel that we could improve the lives of tens of millions of people, and in that respect, we have succeeded. I don’t care about getting credit, but we could use allies since this is an ongoing battle. While we can think of long-term policies, that are both politically and practically difficult, which could offer huge benefits (Medicare for All is one obvious example), pushing the Fed on pursuing a high-employment policy is a politically and practically feasible policy that offers immediate and certain gains.

I remember a few years back the Republican Congress was pushing a budget that called for a 5 percent cut in the food stamp budget. This cut would have been roughly equal to $4 billion a year or 0.1 percent of the federal budget. The liberal punditry and many inside the Beltway groups rallied to beat back the proposed cut.

While I’m glad they stopped a cut which would have hurt a lot of low-income people who depend on this benefit, the difference between 3.8 percent unemployment and 5.5 percent unemployment probably means close to a hundred times as much in terms of wage income for low- and moderate-income households. It would be nice if it got almost as much attention.